The closer you get, the clearer the picture. Usually. As we start 2006, expectations for the year's truck and trailer sales are moving from the confident predictions of six months ago to cautious opinions with footnotes. Or as one component supplier puts it, “The crystal ball is getting cloudier.”
Depending on who's looking at that cloudy crystal, heavy-truck sales in 2006 will be slightly below, equal to or slightly above the strong sales seen in 2005, with medium-duty trucks also following one of those three patterns. And trailers may, or may not, see a pause in the sales increases of the last few years before picking up again in 12 months.
While the implications are still uncertain, the reason for that uncertainty is clear — 2007 and its stricter diesel emissions requirements require new and more costly technology for all trucks over 10,000 lb. GVW. You can lay out a number of plausible scenarios for trucking's 2006 equipment-buying plans, but every one starts with the premise that they will in some way be shaped by 2007 emissions.
When the industry faced a similar emissions deadline in late 2002, fleets reacted by buying as many heavy-trucks as they could before the switch and then pulled back on purchasing equipment with the new emissions technology. The result was a boom in truck sales followed by a sudden 50% drop. The sharp fall in truck sales precipitated major restructuring in the vehicle and component manufacturing industries that is, to some extent, still under way today.
Truck makers and their component suppliers have worried that the same “pre-buy” scenario would return for 2006/2007. But this time around there are a number of significant differences making a pre-buy of that magnitude far from certain even only 12 months away from the emissions deadline.
In 2002, the production deadline for the new emissions technology was greatly shortened by a court order, creating real questions about engine reliability and performance for fleets. This next stage, though significantly more stringent than the 2002 requirements, is part of a well-defined emissions reduction plan that's been in the works for years. Engine and truck manufacturers have been following an orderly research and development plan leading to well-understood and trusted technology. That argues against a pre-buy.
Cost, both initial and operating, is another issue. Diesel engines of all sizes will cost more in 2007 and will see some degradation in fuel economy. That could encourage fleets to buy heavily in 2006, except that hard numbers on the final initial cost for 2007 engines and their fuel economy haven't been made public yet.
Finally, 2002 was the start of a general downturn in the economy, which meant freight and fleet revenues took a big hit. Even if fleets weren't concerned about the 2002 emissions technology, many didn't need or couldn't afford new trucks. Economic conditions are quite different now. The for-hire side of trucking has just come through two years of growing revenues and profits fueled by an expanding economy and tight freight capacity. This year and the next few should see those good conditions continue (See “Fleet Outlook '06,” p. 18), which means fleets will need to continue at least replacing older trucks. Chalk up one more argument against a significant drop in truck sales in 2007.
Not so fast, say some industry analysts. The sharp run-up in diesel fuel prices has put a good deal of pressure on fleet profitability and refocused efforts to maximize truck fuel economy. That argues for fleets trying to acquire as many pre-2007 trucks as possible to avoid the fuel penalty carried by the cleaner engines.
The continuing acute shortage of long-haul drivers for truckload carriers may also factor into 2006 equipment purchase plans for some. On one hand the shortage will keep freight capacity tight, ensuring strong rates and profits. New trucks also help attract experienced drivers, arguing in favor of high purchase levels for over-the-road tractors.
However, truckload carriers aren't expanding operations because they can't get drivers, which would limit their buying to replacement trucks. And some are responding by moving as much freight as they can to rail container operations, further cutting requirements for new tractors. All of which adds up to more uncertainty about truck sales numbers for 2006.
Despite all of the counterbalancing arguments, a number of industry observers and participants are willing to offer their views on how the year will evolve, although all acknowledge that this year predictions need to be understood as just that — best-effort attempts to describe a still unfolding future.
Starting with the analysts, the investment house Bear Sterns and Co. believes the pre-buy may have already occurred in the Class 8 market. In their opinion, larger fleets have largely filled in the 2006 order board “backwards,” that is, placed orders for delivery in the second half of the year. Sales at the end of 2005 softened compared to 2004 and the first half of 2005, and they expect order slots for the first half of 2006 to “generally remain widely available.”
Bear Stearns has yet to see any indication that truck OEMs will cut production rates from the near capacity levels they've been running for some time, which means there will be new trucks available for those that do decide to pre-buy, but only if they're willing to take them now.
Among the truck OEMs, the consensus is that Class 8 truck sales this year will run slightly ahead of 2005 — between 290,000 and 300,000 retail sales for the U.S. and Canada compared to last year's 280,000 to 290,000 units. In the view of many, the continued strong sales will be driven as much by a growing economy and freight levels as by any desire to pre-buy ahead of 2007. More importantly, most say they don't have any more production capacity to expand beyond those levels to satisfy a significant pre-buy if it were to develop.
Disruption from the hurricanes, fuel prices and some general uncertainty about the economy led to the softening of Class 8 sales in the last part of 2005, says Dan Sobic, general manager of Peterbilt Motors and VP of its parent Paccar. Since production levels remained high during that period, truck makers are “entering 2006 with higher inventory levels (of new trucks) than the past two years,” he explains.
“Primarily it's those inventory levels that lead us to believe Class 8 sales in 2006 will finish a bit ahead of 2005,” Sobic says. “From a production capacity standpoint, we're very close to where we can be. There's not a lot of room left for added production.”
As for the various segments that make up the over all truck-buying market, Sobic believes medium-duty sales “will be about the same levels as 2005” and that the market for vocational trucks will remain strong largely due to continued strength in the construction industry.
“With the driver shortage still extremely acute, the truckload segment will be replacing aged equipment rather than expanding their fleets,” he adds.
“I believe that people buy trucks when the demand for freight is there and they don't buy when it's not there,” says Mark Lampert, senior vp-sales for Freightliner LLC. “Fundamentally we're entering the new year with business good and the economy relatively strong, so I'm optimistic that we're going to see a darn good year.”
MAYBE, MAYBE NOT
Although he saw no pre-buy activity at the end of 2005, “once the OEMs have accurate numbers on (2007) price increases in early 2006, I think the interest level [in pre-buying] will spike up.”
However, Freightliners' customers are sending mixed messages. “Some say they're not going to change their depreciation and capital investment schedules [to pre-buy before 2007], but other are taking a wait-and-see approach,” Lampert says.
Like the other truck builders, Freightliner has been at peak production rates since the middle of 2005, which means even if a large number of fleets suddenly decide on a heavy pre-buy, it probably won't be able to accommodate any large influx of new orders. “The industry might be able to up [production] by 10,000 to 20,000 units, but there just isn't any more capacity for a significant increase,” he says.
Vocational truck sales heated up during the last half of 2005 due to the string of hurricane and rebuilding efforts, resulting in “a big-time back up on the body installation side,” says Lampert. Generally less sensitive than over-the-road fleets to emissions costs, vocational buyers tend to be less cyclical in their purchases and “we expect 2006 to be a normal baseline vocational market,” he says.
Medium-duty truck users are also less focused on emissions issues “because trucking is usually not their primary core business,” says Lampert. “But that customer base is more sensitive to fuel prices because [unlike for-hire heavy-duty fleets] they can't pass along that cost with fuel surcharges,” says Lampert. That could slow down medium-duty truck replacement in 2006 to some degree, “but as long as economic fundamentals are good, the medium-duty business will be pretty good, too,” he says.
While feeling that “it's premature to comment (on a pre-buy) at this point,” Kenworth Truck general manager and Paccar vp Bob Christensen is “planning on 2006 [heavy truck sales] being similar to 2005 because the economic fundaments are still strong.”
Not only do freight levels remain high, but the average age of the heavy-truck population argues for continued strength in sales. “It came down in 2005, but [the average age] is still long in the tooth compared to historic levels,” says Christensen. “So fleets are going to need replacements based on that irregardless of [emissions] engine activity.”
Overall, medium-duty truck sales did experience “a little pause in late 2005 when fuel prices really got up there,” he adds. “But now that they've receded to more normalized levels, sales activity is picking up.”
As for vocational truck sales in 2006, Christensen expects “more of the same — it will feel just like 2005.”
While Volvo Trucks of North America (VTNA) and Mack Trucks declined to be interviewed, both submitted short written responses to questions about expectations for the 2006 truck market.
“We're not in the forecasting business, but barring unforeseen circumstances such as a significant downturn in the economy or a major geopolitical event, we expect the North American market for heavy-duty trucks to remain strong in 2006, with retail sales levels comparable to 2005,” wrote Mack spokesperson John Walsh.
VTNA spokesperson Jim McNamara seconded that expectation, pointing out: “The general freight economy remains strong and our customers are making money. We continue to see the market driven by replacement demand, rather than expansion.”
Writing in late November of 2005, McNamara added Volvo does “expect that there will be a pre-buy, but [we] have not seen evidence of it yet.”
LIGHT AND MEDIUM TRUCKS
Variations in medium truck buying cycles are “gentler than in the heavy-duty market, but they're still there and [in 2006] they will be driven by the price increase for 2007 diesels,” says Todd Bloom, vp-marketing General Motors Isuzu Commercial Truck (GMICT). “We expect a 5% to 10% growth [in medium truck sales] in a typical year,” he says, but the next two years could prove to be quite atypical.
Price alone will drive medium-duty pre-buy activity in GMICT's view. The impact on fuel economy is not a major concern for most MD fleets, nor is reliability of the new emissions technology, says Bloom. With early estimates of $3,000 to $7,000 premiums for 2007 MD diesels, “there will be a huge pull ahead for fleets if it ends up at the higher end [of that estimate],” he says.
While GM/Isuzu believes its 2007 price increase will be “more like $3,000 to $5,000,” even that could be enough to trigger some pre-buy activity by larger fleets, Bloom believes. “If they run a typical 5-yr. average life, those fleets can avoid [buying new trucks] in both 2007 and 2010 [when even stricter emissions rules take effect] by acquiring trucks in 2006,” he says.
Bloom hasn't “seen any pre-buy activity yet, but by the second half of the year, the impact of the initial price increases as well as maintenance increases [for the new engines] will create a much stronger pull ahead, and that will lead to a decrease [of medium-truck sales] in 2007.”
The light-duty commercial van segment of the market “doesn't really fluctuate much,” according to Patrick Dougherty, director of commercial rental and government sales for the Dodge Group. “We're forecasting 380,000 units for commercial vans next year.”
Although trucks under 10,000 lb. GVW aren't covered by the 2007 diesel emissions rules, many light vans, including the Dodge Sprinter, carry higher gross ratings. “That's driving some cost [those trucks],” says Dougherty, who reports that some larger van fleet buyers are indicating that “they would like to heavy-up on ‘06 purchases.
“They're not saying why, but I believe it could be emissions related.,” Dougherty says. “Fuel economy in a large courier fleet, for example, is a real concern. And then there are questions about maintenance costs. They'd rather bet on what they have today.”
Overall, though, Dougherty doesn't expect the market to experience much of a pre-buy rise and fall in sales over the next two years.
“A slight uptick” in heavy-duty truck sales is the 2006 expectation for Eaton Corp., according to Dimitri Kazarinoff, director, global marketing. “Freight is at all time highs and the average age [of the North American truck fleet] is a little bit on the old side, so sales will be driven principally by replacement demand.”
However, Eaton does expect “some level of pre-buy,” which is what will actually push those numbers over 2005 levels, he says. “Without a pre-buy, 2006 wouldn't be quite as high as 2005, but industry [production] is running close to flat out and that will limit the amount of pre-buy.”
For component suppliers and truck builders, the problem will be “preparing to ramp down [production] volumes for the drop in ‘07,” Kazarinoff says. “Come the end of the year, all manufacturers will be walking a tightrope so they're not overextended and over-staffed come that drop off.”
With much longer trade cycles than heavy-duty truck users, “medium-duty users don't change buying habits as much based on yearly changes in cost, and we don't see much pre-buy there,” he says. Based on economic strength, Eaton expects medium-truck manufacturers in North America will build about 5,000 more units than in 2005.
The advice from component maker ArvinMeritor is “shop now if you want any trucks before 2007,” says Dennis Kline vp-worldwide truck sales and marketing. While heavy-truck sales were a bit soft at the end of 2005, “once the OEMs start announcing ‘07 pricing, you're going to see an ‘ah-ha’ sweep across the marketplace,” he says. “Larger fleet orders will start kicking in towards the end of the first quarter, and then the industry will see the order backlog fill up rapidly. Smaller fleets [that wait] will find that they can't get trucks in time to pre-buy before 2007.”
Like most other industry suppliers, Kline believes that despite pre-buy pressure, production limits will keep overall heavy-truck sales from going much above 2005 levels “even though there are signs that the market wants to go significantly higher.”
The silver lining in that situation for suppliers is that the unsatisfied 2006 demand will somewhat help soften the sales drop in 2007, he adds.
On the medium-duty side, ArvinMeritor expects to see a 10% to 15% drop in North American production this year because “that market more closely follows the economy, which is slowing a little bit, and there is no artificial stimulus — pre-buy — driving it.,” says Kline.
NOT SO BAD
The details vary, with some predictions for 2006 truck sales moving up a bit and other slightly down, but when you take a broader view it's apparent that truck OEMs and their suppliers expect sales activity to remain strong. Some of that activity will be replacement for aging vehicles and some will be fleets buying ahead of the 2007 emissions deadline, but overall manufacturers have little capacity in reserve to go much above 2005 sales volumes. Everyone seems to agree on that scenario.
The bigger issue for trucking's vehicle and equipment suppliers is what happens the following year. Will the rapid drop in sales seen in 2002 be repeated in 2007, or will fleets keep buying new, though more expensive, trucks?
Keep your eye on the crystal ball. The answer should get much clearer in the next few months.
Although they don't carry engines, trailer sales this year are also expected to feel the impact of the 2007 diesel emissions deadline. Trailer manufacturers “will probably ship about 250,000 trailers when all the counting is complete for 2005,” says Bruce Sauer, editor of Trailer/Body Builders. “That will be about 6 to 7% more than  levels, and it will be almost twice the number of trailers manufacturers produced in 2002, the year the industry bottomed out.”
While “there is still plenty of pent-up demand for all types of trailers as a result of the severe downturn the industry experienced earlier this decade…the race to buy tractors ahead of the 2007 emissions regulations may cut into the budget for trailers [in 2006],” Sauer says. That capital drain, combined with rising operating costs for fleets, will result in no growth for 2006.
Forecasts at the end of 2005 offered signs of improvement in that overall economic indicator, growth in GDP, which left Craig Bennett, sr. vp-sales & marketing at Utility Trailer “pretty encouraged” about 2006 trailer volumes.
“Overall, I think ‘06 should be close to ‘05 numbers for the industry,” Bennett says. In the first half of the year, he expects fleets will spend “money on trucks that could have gone into trailers” as they pursue pre-buy strategies. “But that should result in some pent-up demand that we'll see later in the year.”
Sales of dry-freight vans, which make up the lion's share of the North American trailer market, “remain the big question mark” for 2006, Bennett expects refrigerated and flatbed retail sales to remain strong. “The construction and agriculture markets should be pretty strong, and they drive flatbed sales,” he explains. “On the reefer side, leasing and private fleets have a continuing need for modern equipment with better temperature control accuracy.”
“Diversion of trailer capital to pre-buy trucks” is likely to result in “somewhat softening trailer demand in 2006,” according to Chris Adkins, sr. vp-sales and marketing for Great Dane Trailers. Combined with “ongoing driver availability problems” and sharp increases in fuel and all petroleum-based products, that should lead to slower sales.
Speaking in December, Adkins pointed to “solid order backlogs,” but acknowledged that looking ahead 12 months “there's still a lot of field left to play on, and the question is how much money will be available to buy trailers?”
Looking at the various segments of the trailer market, Adkins believes that the truckload sector will drop back on orders for both dry-freight and refrigerated van, but that private fleet, LTL, food service and leasing orders for higher-spec vans and reefers “will all remain solid in 2006.”
The one area he expects to see year-over-year growth is in flatbed sales. “Typically [the winter] is a slow time for flatbed sales, but this year strong building and construction activity have kept orders coming in,” Adkins says.